Corporate IT is about to face a surge in demand for innovation, but is it ready? In the first quarter of 2011, 20% of S&P 500 companies reported that their revenue exceeded prerecession peaks. Many more will reach this milestone before the end of 2011. When this happens, the brakes come off capital spending. In fact, that elite 20% grew capital spending up to 65% faster than the rest.

With greater capital spending comes more appetite for innovation, and at most companies IT is expected to play a full part. But despite all the hype about IT innovation and the CIO as "Chief Innovation Officer," the reality is that corporate IT's ability to innovate has atrophied. In many organizations, years of cost cutting, standardization, and simplification came at the expense of innovation. Deploying ERP, consolidating data centers, or completing an outsourcing deal are difficult and worthwhile but rarely innovative.

Besides not being innovative, they may actually be harmful to innovation. The behaviors and processes required--efficiency, repetition, process discipline, and risk aversion--are contrary to the flexibility and creativity that lead to innovation. One leading CIO told us recently that many innovators and critical thinkers left her organization as they battled their way through a multiyear ERP implementation.

To be truly effective at innovation, CIOs must rethink the way IT works with the rest of the business, incentivizes staff, and evaluates investments. CIOs must do this without sacrificing the efficiency and operational excellence they have so painstakingly acquired. In recent research, Corporate Executive Board's Information Technology practice examined how exemplar IT organizations are successfully navigating this dilemma.

1. Foster Openness To Innovation

Andrew Horne, Corporate Executive Board

Innovation entails creative tension and a willingness to take risks. For example, business-facing IT staff must be able to "challenge" their business partners, not just build relationships and seek consensus. More broadly, IT leaders should take another look at IT staff performance criteria to ensure that creative thinking and appropriate risk-taking are encouraged, not penalized.

2. Expand The Pipeline Of New Ideas

Innovation requires openness and collaboration within and beyond IT. We have seen a number of techniques, including regular newsletters highlighting innovations in IT and idea-sharing partnerships with external parties, as well as less conventional approaches, such as spotlighting when employees are working around IT systems, in order to uncover unstated end user needs.

3. Triage The Most Promising Ideas

Often, the hardest part of innovation isn't generating ideas; it's deciding which to place bets on and pursue. A traditional project proposal without measurable ROI may just be a bad proposal, but an innovative idea may have no measurable ROI because it hasn't been tested. To distinguish between the two, IT organizations need a quick, lightweight filtering mechanisms based primarily on nonfinancial criteria and drivers of competitive advantage. The idea is to determine whether an innovation warrants further exploration, not to generate a business case or estimate ROI, as too little is known about the innovation to assess the business case effectively.

4. Adopt A 'Test And Learn' Approach

"Fail" is an unwelcome word in IT, but sometimes, indeed often, innovations fail. The secret is to get to the failure as quickly and cheaply as possible, accept the failure without faulting anyone, and move on.

One way to do this is to identify potential uncertainties. Typically, the uncertainties relate to the business model, not the technology. Asking "Will this idea really improve how we do business?" is usually a better approach to finding the uncertainties than asking "Will this technology work?" Having identified the uncertainties, the next step is to test them, starting with the most serious.

For example, an insurance company we work with wanted to test whether a new type of online quote generator would win more business from agents. The biggest uncertainty was whether the delivery of faster quotes would make a difference in the market. Having identified the value of fast quotes as the first uncertainty to test, the company looked for a simple low-cost experiment. Instead of building a prototype, it asked its call center to start providing quotes by email. The faster quotes did win business, so they moved on to test the next uncertainty.

So what does the innovative IT organization look like? It's an organization that challenges its business partners, encourages its staff to be creative and take risks, doesn't always look at project ROI (at least not at first), and isn't afraid to fail. This is a tall order, but if IT can master it, then it will provide a capability few can match.

Andrew Horne is managing director at the Corporate Executive Board. Write to us at iwletters@techweb.com.

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